Hungary's Central Bank Law Is Getting It In All Sorts Of Trouble

S&P just cut Hungary's long and short-term credit
rating to 'BB+/B' from 'BBB-/A-3' with a negative
outlook. A crucial reason for the downgrade, were
changes to its policy framework.

Hungary currently has before its parliament legislation that
could change the way its central bank appoints its management
team and the committee in charge of setting the interest-rate.
Specifically,
the Central Bank Law proposes that the number of rate-setters
increase from seven to nine, and would allow the prime minister
to appoint deputy governors, instead of the central bank
governor. The central bank would also have to submit its agenda
to the government. The changes are part of Hungary's new
constitution which will become effective in 2012.

"In our opinion, changes to the constitution and the functioning
of some independent institutions, including the central bank and
the constitutional court, have undermined Hungary's institutional
effectiveness.

Following changes to the process of appointing members of the
central bank's monetary policy committee in 2010, the authorities
most recently have proposed legislation that we believe could
further compromise the central bank's independence.

...Moreover, we believe that measures taken over the past year,
which affect several services sectors, could hinder economic
growth by reducing banks' willingness to lend and companies'
appetite to invest. In particular, the imposition of temporary
tax hikes on various services--including telecoms,
energy, and the financial and retail sectors--is likely to
depress investment and job creation in the short term, in our
view. This could constrain growth prospects at a time when we see
risks to the open Hungarian economy are rising due to the
uncertain outlook for the global economy."

"Furthermore, an estimated 50% of total general government debt
is denominated in foreign currency, which we think makes the debt
burden highly sensitive to exchange rate fluctuations. Another
potential area of risk is the large share of
foreign-currency-denominated loans to the resident private
sector, largely to unhedged Hungarian households. The high level
of foreign-currency-linked liabilities constrains Hungary's
monetary flexibility, in our view."